The pillars of fiscal decentralization

Abstract

Fiscal decentralization can de be defined as the process of transferring budgetary authority from central government to elected subnational governments in order to grant them power to make decisions regarding taxes and expenses. This paper discusses, theoretically and empirically, what some consider the three pillars of fiscal decentralization: expenditure assignment, revenue assignment, and intergovernmental transfers. In the real world, almost all countries have these three pillars. However, there are no two countries alike because of the different possibilities at hand in designing a decentralized fiscal framework. Here, the international experience is studied to shed some light on the various institutional and practical issues arising in the design and implementation of fiscal decentralization. Not surprisingly, results vary widely, and this experience suggests that there are different ways of achieving a successful framework. Therefore, this paper intends to point and describe the key elements that contribute to achieving an effective decentralized fiscal framework that responds more efficiently to the demands of its constituencies.